Three Strategies to Uncover Cash in the Supply...
Transcript of Three Strategies to Uncover Cash in the Supply...
Holistic Supply Chain Management
Three Strategies to Uncover Cash in the Supply Chain
A GT Nexus White Paper
© GT Nexus, Inc. | www.gtnexus.com2
Executive SummaryThere is a renewal of interest in the financial elements of supply chain management today. Businesses are using
agile, cloud-based technology to optimize working capital and glean liquidity from improvements in supply
chain activities.
Managers who were previously immersed in day-to-day operations are beginning to see their role in working
capital management take on a new form. They are inspecting the different components of the cash conversion
cycle and finding ways to free up cash in the supply chain — a responsibility once reserved for the CFO.
Working capital management has its roots in the cash conversion cycle because in the supply chain, the more
quickly a company can convert purchases from its suppliers to cash from sales, the more quickly it can use that
money to finance other operations. This is particularly important in a volatile economy or tight credit market,
where sources of external financing are not guaranteed.
In a rapidly changing global trade environment, organizations must use cash wisely while remaining open to
investments that support long-term prosperity — in technology, people, and infrastructure. Today, companies
are illustrating the importance of a holistic approach to working capital management, embracing new technol-
ogy while adapting workflow to meet the demands of an agile, global supply chain.
© GT Nexus, Inc. | www.gtnexus.com3
Working Capital Management — New Rules, New People, New ToolsIn a bullish economy, companies can rely on revenue
streams and credit from fi nancial institutions to fund their
operations and investments. In a downturn, they must
reign in spending and fi nd internal sources of cash; extract-
ing liquidity from managing working capital has become an
increasingly popular way of accomplishing this.
Now, the global trade environment is conducive to
innovation. A residual air of caution from the most recent
economic downturn has kept the spotlight on optimizing
working capital, as analysts and investors put a higher
premium on companies with greater liquidity. The CFO’s role has become more strategic and shifted some of the
responsibility for working capital to division managers in supply chain, fi nance, and logistics. Furthermore, the
increasingly complex demands of global supply chains are encouraging companies to embrace the technology
they need to view a clear picture of supply chain activity across their network of trading partners.
Managers are taking their knowledge of global logistics and their tools for increasing visibility into the supply
chain and focusing on the most effective area for managing working capital: the cash conversion cycle. This
measurement shows how effi ciently a company uses its cash to run operations — from making purchases from
suppliers to selling the fi nished goods to customers. Managers can deconstruct the parts of this equation to
shorten the cycle and free up cash in the supply chain.
Strategy: Reduce Days Inventory Outstanding (DIO) Lower the amount of buffer stock
needed to maintain customer service levels.
Buffer stock can help guard against stockouts, poor customer
service, and the need for costly expedited air freight to meet
demand.
Who Cares about Working Capital?Managers in fi nance, logistics, and supply chain are coming up with new ideas to manage their working capital. Cloud technology providers are creating the tools to make their ideas a reality.
FIGURE 1: Working Capital 101
DIO Days Inventory Outstanding: Days inventory is sitting unsold
Days Sales Outstanding: Days before payment is made for goods soldDSO
DPO
+Days Payable Outstanding: Days before suppliers must be paid
Cash Conversion Cycle: Days it takes to turn a purchase from a supplier into a cash sale CCC=
Days Inventory Outstanding: Days inventory is sitting unsoldDays Inventory Outstanding: Days inventory is sitting unsoldDays Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days Inventory Outstanding: Days inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsoldDays inventory is sitting unsold
TACTIC
How many days is inventory sitting in the supply chain from the point at which it’s purchased from a supplier to the day it’s sold to a customer?
DIO
Average Inventory
Cost of Goods Sold (COGS)
© GT Nexus, Inc. | www.gtnexus.com4
However, by increasing visibility into inventory moving along the supply chain, a company can lower the
amount of goods it keeps on hand for emergencies.
• Use a supply chain platform that provides full visibility into in-transit and on-hand items to improve the
accuracy of inventory counts and reduce unnecessary orders.
• Look at real-time transit data and make reallocation decisions based on current demand — before the
point at which costs of freight skyrocket.
Use inventory postponement to reduce cost of goods sold (COGS).
Companies can improve goods fi rst cost — in other words, the actual supply cost before the goods are moved
through the supply chain and into stores — by concentrating orders with suppliers, moving them to a regional
warehouse and allocating smaller shipments to the fi nal destinations.
• Use software that provides real-time logistics data to choose the best route for your manufacturing and
retail footprint.
• Order in larger quantities from suppliers to save in sourcing costs; this reduces cost of goods sold, there-
fore bringing down the overall days inventory outstanding.1
1 In the simplifi ed equation above, it appears that reducing COGS will increase DIO. However, typically a reduction in COGS will reduce the average inventory balance by a greater proportion, thus reducing overall DIO.
TACTIC
Supplier Supplier
Customer 1Customer 1
Customer 2Customer 2
Customer 3Customer 3
Customer 4Scenario 1: Standard
Scenario 2: Dynamic Allocation/PostponementCustomer 4
DCDC
Regional DCRegional DC
PO #1
PO #2
PO #3
PO #4
FIGURE 2: Inventory Postponement
Reduce COGS by shifting the burden of supply chain costs.
Isolate supply chain costs from components that go into a supplier’s calculation of the fi rst cost, which includes costs it incurs to move, package, and get paid for goods sold to its customer. If the customer is larger and has better buying power than the supplier, the customer can take on the responsibility for these costs and reduce overall COGS.
OPPORTUNITY
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Strategy: Reduce Days Sales Outstanding (DSO) Use a collaborative platform for shipment
planning and execution.
Technology is playing a huge role in managing shipments, especially
in the execution stage where visibility was non-existent with legacy
ERP systems. Companies are relying less on past data and fore-
casted demand and more on real-time data — often using current
information from stores and warehouses on sales and inventory.
• Use advanced shipment planning tools to ensure that inventory never sits idle after production.
• Monitor dynamic transit data to get shipments to customers more quickly, resulting in faster payment.
• Share updated data from stores across a network of supply chain partners, adjusting shipment plans
accordingly.
Get cleaner, faster documentation in the cloud.
Automated, electronic documentation leads to shorter payment cycle times — invoices, bills of lading, and
other documents can be generated electronically, leading to earlier verification and approval. Translation and
reconciliation is done in the cloud, over the network, and not at the end of the spokes at each individual part-
ner. Everything is updated and instantly visible over a company’s approved trading partners, which accelerates
payment and lowers DSO.
• Aim for 100% electronic documentation to expedite the payment process.
• Eliminate discrepancies that may cause banks and customers to delay payment with data standardization
in the cloud.
TACTIC
TACTIC
VAT Invoice Refund
Companies with local offices that buy from local suppliers may be subject to value added taxes (VAT). If a company exports goods to its customers or owns stores abroad, it is eligible for a VAT tax refund.
However, refunds can be delayed if a government tax authority identifies discrepancies in the invoice documenta-tion. This can tie up cash in the supply chain that could be used elsewhere.
By using a cloud-based platform that generates documents from a single data repository, a company can remove discrepancies as a cause for delayed VAT refunds. The sooner a tax refund arrives in a company’s account, the sooner cash is freed up in the supply chain.
OPPORTUNITY
How many days does it take to turn materials from suppliers into cash from sales?
DSO
Average Accounts Receivable
Revenue
© GT Nexus, Inc. | www.gtnexus.com6
Strategy: Increase Days Payable Outstanding (DPO) Improve and automate supply chain fi nance.
Buyers who want to employ a holistic approach to supply chain
management must do more than stretch payment terms to the
limit. Eventually, extended payment terms cause suppliers to suf-
fer, weakening the overall supply chain infrastructure. An alterna-
tive to the traditional way of increasing days payable is to employ
a supply chain fi nance strategy that allows suppliers to get early
fi nancing through their buyers’ relationships.
• Craft a supply chain fi nance strategy that benefi ts both the buyer and the seller.
• Leverage buyer credit ratings to extend better fi nancing to smaller suppliers through bank-buyer
relationships.
• Use a platform on which buyers, sellers, and banks can collaborate in a cloud environment.
• Streamline purchase-to-pay on the platform to avoid errors and obtain quicker fi nancing.
Amazon’s Negative Cash Conversion Cycle Defi es the Norm
Online giant Amazon maintains a negative CCC. The company manages to hold inventory for only 30 days and receive payment within 10 days; it then pays payables in 54 days. Because Amazon sells online, it doesn’t hold much inven-tory and often sends POs to suppliers after the customer pays with a credit card.
Not all companies can pull this off while keeping their suppliers satisfi ed and holding enough inventory to meet customer demand. However, those that can’t operate with negative working capital can still keep in to a minimum by using supply chain fi nance software on a virtualized platform of trading partners.
Source: Forbes
FIGURE 3: Supply Chain Finance in Action: Sellers can leverage their buyers’ stronger credit ratings to get fi nancing based on buyer-approved invoices.
PO
BankBank
Buyer’sAccountsPayable
Buyer’sSupplier’sAccounts
Receivable
Supplier’s
Buyer issues purchase order
Supplier delivers goods
Supplier invoices buyer
Buyer approves invoice for payment; sends confirmation
Supplier offered early payment discount
Supplier accepts early payment discount
Bank funds early payment
Buyer makes payment on original due date
11
2 2
33
4
5
6
7
8
Goods
$$
5
6
7 8
4
invoice
TACTIC
How many days does it take to pay suppliers for purchased goods?
DPO
Average Accounts Payable
COGS
© GT Nexus, Inc. | www.gtnexus.com7
Supply Chain Improvement from Every AngleManagers are choosing to focus on working capital optimization because it is comprehensive. A holistic plan
encompasses all of the supply chain operating levers: inventory, receipts, and payments. Executives can set
clear operating goals in each department, all of which will work towards the same solid objective — fewer days
in the cash conversion cycle.
These working capital strategies can be propelled into action over a collaborative, cloud-based supply chain
platform. The technology provides inventory visibility and in-transit data over the network while improving
documentation and communication shared among trading partners. Transactions between banks, suppliers,
and buyers happen instantly and accurately. Data quality is vastly improved, allowing for better measurement
of progress against goals.
The result of this approach is a healthier financial position, a solid long-term management strategy, and a
simple metric by which the company can measure the efficiency of its supply chain. In the increasingly complex
and segmented global trade environment, a strategy that works across the board can be a priceless tool.